The influence of banking liquidity risk on profitability: The moderating role of capital adequacy ratio

Abstract

The decline in bank liquidity due to slowing economic growth in Indonesia has decreased bank profitability. COVID-19 and the increase in the number of non-performing loans increased the level of bank liquidity risk and decreased capital. Hence, the purpose of this study is to analyze the influence of banking liquidity risk on profitability in the Indonesian banking sector and to examine the role of capital adequacy ratio as a moderating variable. The method section explains panel data analysis using the random-effect model in analyzing the influence of liquidity risk on profitability and the role of capital adequacy ratio as a moderating variable. The results of the analysis show that liquidity risk has a significant positive influence on profitability at the 1% significance level. Moreover, the t-statistic value for capital adequacy ratio as a moderating variable is 2.59 at a 1% significance level. This result shows that the capital adequacy ratio can moderate the relationship between liquidity risk and profitability. Furthermore, the robustness test results show that the deposit risk ratio is a good indicator for estimating liquidity risk. In addition, this study is useful for the banking sector in managing its capital adequacy ratio and as a reference for the government in setting policies related to banking capital.